Santa Monica city officials had no idea they would trigger an international legal brawl when they sent their water out for routine testing in 1996 and discovered it contained the foul-smelling gasoline additive MTBE.
Formally known as methyl tertiary butyl ether, MTBE was banned by California because of its perceived threat to humans and the water supply. But what began as an environmental issue took a twist into international trade when a Canadian firm contested the state order under a provision of the North American Free Trade Agreement.
In the first such case involving a challenge to a U.S. environmental measure, Methanex Corp., the world’s largest producer of methanol, a primary ingredient in MTBE, claims Gov. Gray Davis acted in a protectionist manner by imposing a ban that harmed foreign methanol producers and benefited Archer-Daniels-Midland Co., a campaign donor and domestic maker of a competing fuel additive, ethanol.
Saying its investors were hurt, Methanex is demanding nearly $970million in damages because of the MTBE phaseout, slated to be completed by 2003.
Investors can only sue for compensation and cannot force a government to change a law. But experts say a multimillion-dollar award in the Methanex case could have a chilling effect by discouraging federal or state governments from considering similar measures. More than a dozen states are considering action to restrict the use of MTBE.
The case also has become a cause celebre for globalization critics who argue the case underscores their concern that free trade agreements give companies too much power and undermines the sovereign rights of governments to protect their citizens.
The Methanex case, brought in 1999 under NAFTA’s Chapter 11 which allows foreign investors to sue a government for violating their trading rights, is pending before a three-member tribunal in Washington. A decision is expected soon on whether the tribunal has jurisdiction in a case that could take years to work its way to resolution.
If Methanex is victorious, the firm hopes the U.S. would take steps to remove the prohibitions on MTBE, according to Jim Emmerton, a Methanex senior vice president.
He argued that the European Union recently gave the green light to MTBE after determining that it did not pose a public health or environmental risk.
Methanex’s Maker Says Product Isn’t Dangerous
“We would hope the U.S. would look at what other jurisdictions are doing,” he said. “MTBE is not a threat to human health and it is not a threat to the environment if it’shandled carefully.”
Archer-Daniels-Midland, also known as ADM, did not respond to a request for comment on the Methanex accusations. “The governor sets policies based on science and facts concerned with the issue,” according to David Chai, a spokesman for the governor. “Ethanol clearly is not getting favorable treatment in the state of California.”
“Methanex is grasping at straws,” said William L. Rukeyser, assistant secretary at Cal-EPA. “If the record is reviewed, you can see that MTBE regardless of the manufacturer is bad for California. That decision is based on science and science alone carries the day.”
The U.S. government, the defendant in the NAFTA case, termed Methanex’s charge “absurd” and warned that a positive ruling for the company could hurt the ability of the U.S., Canada and Mexico to protect public health and the environment, according to court filings.
“No NAFTA party could carry out its most fundamental government functions unless it were prepared to pay for each and every economic impact occasioned by doing so,” said the U.S. government in its Methanex filing. “The NAFTA parties never intended the NAFTA to bring about such a radical change in the way they function and Methanex cannot show otherwise.”
The U.S. is in an awkward position, having been the most vocal proponent of the so-called investor-state dispute mechanism. These provisions are designed to give multinationals an independent arbiter for disputes in countries where the governments and courts are weak or corrupt. U.S. officials are pushing to have Chapter 11-style investor protections in the proposed Free Trade Area of the Americas that would extend NAFTA throughout South America.
In Santa Monica, which has been forced to shut down more than half of its water supply and spend an additional $3 million a year to purchase untainted water, officials say they are incredulous that NAFTA has opened the door to a challenge from the north.
“The state’s MTBE law was a prudent and measured effort made to phase out a chemical that had proven to be harmful or potentially harmful,” said Assistant City Atty. Joel Lawrence.
“The thanks you get from this is a claim from a Canadian manufacturer that somehow it has the birthright to produce and force this stuff down the gas pipes of California residents and down their digestive tracts as well,” Lawrence said.
MTBE was adopted as a fuel additive two decades ago to reduce air pollution but was later found to be a suspected carcinogen that seeps into the groundwater through leaking gas tanks or gas spills. Even in extremely small amounts, the chemical can make water smell and taste like turpentine. Hundreds of millions of dollars have been spent removing MTBE from the nation’s soil and water.
The U.S. hasn’t been on the losing side in a Chapter 11 case, though it has only faced three claims so far.
Barry Bosworth, a trade expert at the Washington-based Brookings Institution, warned a loss in the Methanex case could spark a “big public conflict” because it involves an attack on a popular environmental measure. Concern over these investor provisions have arisen in the congressional debate over a bill to give the president fast-track negotiating authority for future trade agreements since NAFTA was enacted.
Previous Challenges to NAFTA Regulations
Fifteen Chapter 11 cases have been filed since NAFTA was enacted. Of those, the companies prevailed in four cases, lost one and the remainder are still pending. Canada, the leading target, has lost several cases involving challenges of environmental regulations.
In the last two months, Kenex Ltd., an Ontario, Canada-based producer of hemp products, has threatened to file a NAFTA Chapter 11 case against the U.S. Drug Enforcement Agency for its ban on foods containing hemp and Crompton Corp., a Greenwich, Conn.-based chemical firm, and Dallas-based Trammell Crow Co. have filed multimillion-dollar complaints in Canada.
The rise in Chapter 11 cases and large awards have sparked concern even among the creators of NAFTA. After reviewing the process, the NAFTA governments last July issued an “interpretation” of the Chapter 11 provision that would, in effect, make it harder for foreign firms to prove unfair or discriminatory treatment, according to Todd Weiler, a Canadian law professor and NAFTA consultant.
As the battle over the Chapter 11 heats up, it is also moving through the courts. Canada has filed a federal lawsuit challenging S.D. Myers’ successful NAFTA complaint against that government’s ban on the export of PCBs, a toxic chemical. Myers had claimed $20million in damages. Canadian citizen groups are in court trying to join the government in the federal lawsuit and have also filed a separate constitutional challenge of the Chapter 11 process.
“Our strategy is to make sure when tribunals do award in favor of foreign investors, the cases are appealed all the way up through the entire process so what is a speedy way to extract money from governments becomes drawn out and difficult,” said Steven Shrybman, an Ottawa, Canada, environmental attorney who is involved in those cases.